Many large companies (called “Communicators” in this application) engage in large scale mailing operations in order to communicate with their customers. These core communications, which can include billing or account statements and other missives required by law, are made regularly to a large number of customers. Credit card companies are an example of one such category of companies. Banks and other financial services companies, telecommunication companies, utility companies, and cable and satellite television companies are examples of other companies bearing high monthly recurring mailing obligations. A credit card company, for instance, typically mails billing statements at the end of every billing period (30 days or so) to its cardholders that used their credit card in the prior billing period or that still had outstanding balances. This is to inform their Customers of the amount of purchases they made using their card and thus owe the company. A Basic Mailing sent out to the Customers consists of the following Postal Objects:                An Outgoing Envelope        A number of pages itemizing the Customer's transactions        A Return Envelope        
The credit card company typically pays $0.27 (using the U.S. postal rate changes instituted in July 2002) for postage to mail the above Postal Objects, which generally weigh about 15 grams. However, due to the postal rate structure, the company has actually purchased the right to mail up to 1 ounce (28 grams) of material to that Customer for that same $0.27. That leaves 13 grams of unused or excess capacity. This Surplus Weight could be used for additional material to be mailed to a Customer with no increase in mailing costs. In practice, virtually every Basic Mailing would have Surplus Weight.
Such Basic Mailings represent a marketing opportunity for both the Communicators that have this Surplus Weight available in their core communications to their Customers as well as “third party” Marketers that seek effective and economical ways to gain access to prospective customers. This would be an even more appealing vehicle for many Marketers, if new technology would enhance the ability to customize messages. The Marketers' communications may take the form of a Postal Insert in the Communicators' mailings. A Postal Insert may be a single or multi-panel printed document. Postal Inserts are included in the Customer's mailing, thereby transforming the Basic Mailing into an Extended Mailing. Extended Mailings, like the Basic Mailing, consist of the Outgoing Envelope, a number of Bill Pages itemizing the customer's transactions, and a Return Envelope, but also a number of Postal Inserts.
In essence, the existence of Surplus Weight in Basic Mailings creates a market that can benefit both Marketers and Communicators. Besides various collateral benefits (e.g., credit card companies generate receivables from cardholders charging their card to buy the goods or services), the Communicators can generate additional fee income by offering Marketers the Surplus Weight for which they are paying but not utilizing. The Marketers are able to communicate with the Communicator's Customers at rates well below the $0.27 it would cost to mail directly to these Customers on their own. Consequently, a “Marketing Cycle” exists. The Marketers supply Postal Inserts to the Communicators. The Communicators integrate them with their communications to their Customers. The Customers receive the Postal Inserts, and some respond to the Marketers' offers by purchasing their goods or services thus completing the Marketing Cycle.
The benefits that could be realized by Marketers and Communicators are substantial, so Extended Mailings would be expected to be a common, widespread practice. This has not been the case, however, because the supporting technology and processes have been inefficient. This inefficiency is evidenced, among other things, by the Communicators' chronic and significant under-utilization of available Surplus Weight, and their forgoing the use of demonstrably substantial marketing revenue and other forms of value. The inefficiency is, in large part, due to structural problems in the relations between Marketers and Communicators, and limitations embedded in the prior art technology provided by the firms that supply the machinery and services that perform automated mailing operations (“Transmitters”) (see, e.g., the Phillipsburg Inserters summarized by Baggarly U.S. Pat. No. 4,639,873). Further, as a practical matter, these problems cannot be fully rectified until the prior art technology and processes are replaced by the technology and processes presented herein.
In essence, the problem for the Communicators is how to maximize the value that can be realized from the sale or other use of the Surplus Weight in their core mailings at minimum cost. Value is a broad and general measure of benefit. Value often can be defined as pure revenue, in which case the problem is equivalent to maximizing profits. Value also can encompass managerial mandates that may override pedantic profit calculations. The presented invention offers the opportunity for lasting, optimal economic efficiency in many operations related to postal mailings. Other industries faced with complex distribution or allocation problems for goods and services could also benefit from the economic efficiencies derived from the system and method presented. However, since most of the problems of the prior art are indicated in the poor management of Surplus Weight in Postal Insert operations, the discussion of the presented invention will focus on that aspect.
As discussed below, the economic situations of the Communicators and Marketers provide a foundation of the criticism of the prior art. The crux of the problem is that current technology needlessly interrupts Postal Item processing, thereby artificially inflating costs. This would be a serious impediment in and of itself even if value and/or revenue of Postal Insert operations were being maximized. Yet the current technology impedes the economic efficiency of these operations further by simultaneously preventing anything remotely close to value maximization from occurring.
Value/Revenue Side of Postal Insert Operations: Marketer-Communicator Relations
Marketers typically pay a Customer Access Charge for a Communicator to deliver the Marketer's Postal Insert to the Communicator's Customers as part of the Communicator's Extended Mailing. This price clearly must be less than what the Marketer would pay were it to mail directly to the Customer. However, the Marketer is taking a risk. If the Customer does not purchase the goods or services offered then the Marketer suffers a loss of a Customer Access Charge and all other related costs. If the Customer does purchase the goods or services then the Marketer achieves a profit (assuming its profit from the sale is greater than the Customer Access Charge and all related costs).
The economics for determining whether a profit-maximizing Marketer should take the risk of sending a Postal Insert to a Customer is based on the concept of Expected Net Profit and are relatively basic. The Marketer knows what the Gross Profit for the goods or services is: this is simply the sale price minus the production costs. Given that, the Expected Net Profit of offering goods or services via a Postal Insert campaign can be determined.
The Expected Net Profit of mailing a Postal Insert to a Customer is computed as the Expected Gross Profit minus the Total Insert Costs. From the Marketer's perspective, Total Insert Costs are the sum of the Printing Cost, the Customer Access Charge, the Inserting Cost, and any other per Postal Insert costs. The Customer Access Charge is the fee the Marketer pays the Communicator to include a Postal Insert in an Extended Mailing. The related incremental cost of inserting the Postal Insert into an Extended Mailing is typically very low and might not be an explicit itemized charge. As Marketers generally are only concerned with a combined total cost per Postal Insert they might be presented with just a single, combined price per Postal Insert.
Gross Profit is the uncertain result of sending a Postal Insert to the Customer since there is no guarantee that it will act upon the offer. However, there is an Expected Gross Profit: this is the Gross Profit multiplied by the Probability of Success. The Probability of Success is the likelihood the Customer will respond to a Postal Insert by making a purchase.
Expected Net Profit provides the economic measure of whether the risk of sending a Postal insert is justified. Expected Net Profit is the Expected Gross Profit of a mailing minus the Total Costs of the mailing. Customers with Expected Net Profit greater than 0 are “good” marketing bets. Customers with Expected Net Profit less than 0 are “bad” marketing bets. Put another way, marketing campaigns directed towards Customers with Expected Net Profits greater than 0 should yield profits from the sale of goods and services that are greater than all related costs.
Under prevailing pricing policies Marketers incur costs in the form of Customer Access Charges for the right to send a Postal Insert to a Communicator's Customer. This Customer Access Charge is typically fixed and identical for all Customers. The Communicator sets or negotiates a single, constant Customer Access Charge applying to all Customers. The profit-seeking Marketer accordingly seeks to restrict its Postal Inserts to Customers whom they determine to have sufficiently high Probabilities of Success in relation to that cost. This is the only way to insure their Expected Net Profits are greater than 0 given that all other factors affecting Expected Net Profit are fixed. Table 1 gives a side-by-side comparison of two Customers with different Probabilities of Success.
TABLE 1CustomerCustomerDifference12(2 − 1) 1. Probability of Success0.01000.0080−0.0020 2. Gross Profit$5.0000$5.0000$0.0000 3. Printing Cost$0.0050$0.0050$0.0000 4. Customer Access Charge$0.0400$0.0400$0.0000 5. Inserting Cost$0.0010$0.0010$0.0000 6. Other Cost$0.0000$0.0000$0.0000 7. Expected Gross$0.0500$0.0400$0.0100   Profit (1 * 2) 8. Total Costs (3 + 4 + 5 + 6)$0.0460$0.0460$0.0000 9. Expected Net Profit (7 − 8)$0.0040−$0.0060−$0.010010. Expected Net8.6957%−13.0435%−21.7392%   ROI (100 * 9/8)
Customer 1 has a Probability of Success for the Marketer that, given the other components, yields an Expected Net Profit greater than 0. But Customer 2 has a lower Probability of Success for the Marketer that, given the other components, yields an Expected Net Profit less than 0.
Marketers desiring profitable marketing campaigns typically seek to restrict mailings of Postal Inserts to Customers like Customer 1. They may control the recipients of their Postal Inserts by supplying the Communicators with a list of names and addresses of desired Customers. Communicators then perform a “merge and purge” operation that compares the Marketer's list to the Communicator's master customer list to identify which of those desired Customers can be processed through the use of the Communicator's Surplus Weight.
As an aside, there are a number of commercially available databases and information sources that provide quite a bit of information at the customer and household level (approximately 100 million households in the U.S in July 2002). Marketers can obtain a large body of useful information on potential customers to estimate Probabilities of Success. This information includes:                Gender        Age        Ethnicity        Creditworthiness        Household income        Automobile characteristics        Number of children in household        Age distribution of children        Past marketing success by Marketer        Nielsen television classification        OtherProblems on the Value/Revenue Side of Postal Insert Operations: Marketer-Communicator Relations        
In a truly economically efficient environment, Marketers would be agreeable to any opportunity that carried an Expected Net Profit greater than 0 and any opportunity that was mutually beneficial to Marketers and Communicators could be offered. Marketers, on the whole, are rationally responding to the pricing conditions presented them by restricting recipients to those with presumed higher Probabilities of Success, and hence, Expected Net Profit greater than 0. Yet Communicators have so far not fostered mutually beneficial relations with Marketers.
Communicators consistently failing to generate any value whatsoever from the many millions of Surplus Weight opportunities they possess, at a given price, should be amenable to lowering the price to any level that remains profitable for them. Unless they do so they will find themselves in a situation of their own making wherein they repeatedly miss out on value/revenue opportunities. Under the prevailing Fixed Pricing scheme they are issuing implicit dictums to Marketers to “take it or leave it” at the set Customer Access Charge. The Marketers' rational response is quite often to “leave it” when their Expected Net Profit falls below 0. However, if the Customer Access Charge were lowered for Customers whose Expected Net Profits are less than 0, then the Marketers' Expected Net Profits would increase. Were the price lowered to a point at which the Marketers' Expected Net Profits were greater than 0 that still was greater than the processing cost then a “win-win” situation would be achieved. Customers who under Fixed Pricing neither offered Expected Net Profit greater than 0 to the Marketers nor generated value or revenue for the Communicators have been transformed: they now offer Expected Net Profits greater than 0 to the Marketers thus warranting a Postal Insert. The Marketers benefit from gaining cost effective, profitable access to a broader universe of prospects. And the Communicators benefit by generating additional value and/or revenue from the available Surplus Weight where previously no value or revenue could be generated. Table 2 shows the same two Customers depicted in Table 1.
TABLE 2CustomerCustomerDifference12(2 − 1) 1. Probability of Success0.01000.0080−0.0020 2. Gross Profit$5.0000$5.0000$0.0000 3. Printing Cost$0.0050$0.0050$0.0000 4. Customer Access Charge$0.0400$0.0300−$0.0100 5. Inserting Cost$0.0010$0.0010$0.0000 6. Other Cost$0.0000$0.0000$0.0000 7. Expected Gross Profit (1 * 2)$0.0500$0.0400$0.0100 8. Total Costs (3 + 4 + 5 + 6)$0.0460$0.0360$0.0000 9. Expected Net Profit (7 − 8)$0.0040$0.0040$0.000010. Expected Net ROI (100 * 9/8)8.6957%11.1111%2.4154%
However, in Table 2, the Customer Access Charge has been lowered from $0.04 to $0.03. In doing so, the Communicator has increased the Marketer's potential Expected Net Profit for Customer 2 from a loss of $0.006 to a profit of $0.004. In terms of Expected Net ROI, Customer 2 actually has become a better marketing bet for the Marketer because its Expected Net ROI of 11.111% exceeds the Expected Net ROI of 8.696% for Customer 1. Expected Net ROI provides direct comparisons between Customers in terms of expected returns per dollar spent. The Communicator now could generate an operating profit of $0.029 (the Customer Access Charge of $0.030 minus its Inserting Cost of $0.001) should it permit the Marketer's Postal Insert to use some of the Surplus Weight. The price reduction has transformed a previously ignored Customer into a profit opportunity for both the Marketer and the Communicator. Lloyds of London, an innovative insurance company, had the motto “There are no bad insurance risks, only bad insurance premiums”. The analog for the Postal Insert industry ought to be “There are no bad marketing risks, only bad Customer Access Charges”.
Cost Side of Postal Insert Operations: Marketer-Transmitter Relations
Effective leveraging of their Surplus Weight requires the Communicators to negotiate with a multitude of Marketers to achieve multiple Postal Inserts per Customer. Essentially, the different Marketers provide the Communicators with lists of the Customers to whom they would like to send Postal Inserts, and the Communicators must coordinate these various demands for access to their Customers.
Communicators typically sequentially process Marketers' lists in “merge and purge” operations, whereby Customers in the Communicator's mailing list that also appear in the Marketers' mailing lists are identified. Those Customers that are common to both the Communicator's and a Marketer's lists are then assigned the particular Marketer's Postal Insert unless it would violate either the Surplus Weight constraint or a possible Maximum Postal Inserts per Customer constraint.
All Customers will be scheduled to receive from 0 to some maximum number of Postal Inserts (e.g., 4) as a result of this Assignment process. Once the Assignment process has been completed, final processing can take place. Final processing is the Construction process performed by the Envelope Stuffing Machine (“ESM”). In the Construction process, all Postal Objects a Customer is to receive are collected and assembled into a Postal Item ready to be mailed. The ESM that perform this are well described in the Baggarly patent.
The basic unit of direct costs for Postal Insert operations under prior art technology is the “Set Up”. Each Set Up requires an interruption of ESM processing operations in order to change the contents of the bins described in the Baggarly patent. Changes in bin contents are required whenever a Customer to be processed has a combination of assigned Postal Inserts that cannot be formed from the contents of the bins as then configured. Set Up costs are practically the only direct Postal Insert operating costs faced by Communicators. These direct costs mainly consist of the cost of a technician's time to change the bin contents.
Problems on the Cost Side of Postal Insert Operations: Marketer-Transmitter Relations
Revenue calculations in the Communicator's Assignment process are straightforward. Whenever a Communicator assigns a Postal Insert to a Customer, the incremental revenue generated is clearly known. It is the negotiated charge for including the Postal Insert multiplied by the number of Assignments for that Postal Insert. The incremental costs attributable to the additional Insert, on the other hand, are essentially unpredictable.
Were a Communicator's incremental cost attributable to the Insert limited to the cost of actual ESM insertion (e.g., electricity usage) then the cost would be predictable. The Communicator's economics would be as simple as the Marketer's economics. The Communicator would only need to compare the incremental value or revenue generated by the Postal Insert to the incremental inserting cost to further refine the Assignment process. Its Assignment policy would be that the addition of the Postal Insert did not violate the Surplus Weight constraint or the Maximum Insert Per Customer constraint, and had sufficient value to cover its incremental cost. In practice, the pure marginal cost of inserting a Postal Insert (electricity needed to insert a Postal Insert) is miniscule and virtually never explicitly accounted for
Unfortunately, under the prior art technology the true incremental cost of adding Postal Inserts beyond the initial Set Up configurations is both complex and practically unpredictable at Assignment time. The addition of a Postal Insert through the Assignment process clearly requires the allocation of an additional bin. Yet, as is explained below, the addition of one Postal Insert generally further requires the allocation of more than that one additional bin.
The core problem under the prior art is its discontinuous economics. Generally, after the first Set Ups are configured for each machine, the Assignment of even one additional Postal Insert to the existing initial set of Inserts mandates the allocation of more than just one additional bin. Moreover, whenever the number of additional required bins exceeds the number of available bins left in the prior Set Up, these additional bins further require a new Set Up.
This unfortunate cost consequence is illustrated by the following example. Suppose an Assignment process has used 10 Postal Inserts, a number equal to the number of bins in a sample Phillipsburg Inserter. Further, suppose that seven Customers groups, each with four Postal Inserts, are produced as a result of the Assignment process. The first group of Customers is assigned Postal Inserts 1 through 4. The second group of Customers is assigned Postal Inserts 2 through 5 , and, so on, up to the seventh group that is assigned Postal Inserts 7 through 10. Lastly, suppose an eighth Customer group is created with just three Postal Inserts: Postal Inserts 8 through 10. Up to this point it is clear that one Set Up, with the 10 Postal Inserts populating the bins, would constitute the total costs for Postal Insert processing. However, were an 11th Postal Insert assigned that added a 4th Postal Insert to the eighth Customer Group above, a total of four additional bins would be required. This is because, under the current technology, the eighth Customer group cannot be supplied Postal Inserts from the first Set Up due to the presence of the eleventh Postal Insert and, therefore, must be supplied its Postal Inserts through a new Set Up. However, because the eighth Customer group also demands Postal Inserts 8 through 10, a total of four additional bins immediately must be allocated in the new Set Up.
Importantly, the additional Assignment of a Postal Insert spawning the need for more than one additional bin can further replicate itself many times in a multi-ESM environment where a large number of Marketers are seeking access to a Communicator's Customers. For example, suppose the Assignment of some first 10 Postal Inserts created the same initial Customer groups as before, and the Assignment of a second set of 10 Postal Inserts (e.g., Inserts 11 through 20) created an analogous eight Customer groups. A 21st Postal Insert used by the Assignment process now might create the need for seven more bins. The 21st Postal Insert would form two new Customer groups with combinations of Postal Inserts that cannot be constructed from the contents of the first Set Ups of the two machines. These are the combination of Postal Inserts 8, 9, 10, and 21 and the combination of Postal Inserts 18, 19, 20, and 21. As the number of Postal Inserts used by the Assignment process increases, this phenomenon can get out of hand quickly. This is because the combination of new Postal Inserts with existing Postal Insert combinations to form new Postal Insert combinations cannot be satisfied by existing Set Up configurations. A simple metric can be used to gauge the problem: divide the total number of bins used in a day's production by the number of Postal Inserts used in the Assignment process. For Communicators that seek to capture significant value from their Surplus Weight this ratio may be quite high, i.e., well above one.
Serious attempts to extract the substantial unrealized value or revenue of Surplus Weight through the Assignment of a large selection of Postal Inserts are likely to have costs exhibiting undesirable increasing returns to scale. Increasing returns to scale in costs means that as the number of Postal Inserts added to the Assignment process increases by a given percent the costs required to process them through ESM increase by more than that given percent. In other words, the processing becomes less profitable as levels of activity increase and can even become unprofitable. Given the increasing returns to scale in costs and constant returns to scale (at best) in value or revenue, the number of Postal Inserts that can be profitably assigned in one day is severely limited. This limit is far below the maximum number of Postal Inserts that could be accommodated by the available Surplus Weight.
Processing dependent on Set Ups also spawns indirect costs. First, each Set Up takes time to perform. High levels of Set Ups per machine necessarily require significant processing interruptions (“down time”) for the ESM. These interruptions reduce the amount of Customers that can be processed by an ESM in a given time period because it is idle when bin contents are being changed. Consequently, a Communicator that must have sufficient ESM to insure it meets its peak load (i.e., the daily billing cycle with the highest number of Customers) would need to purchase additional ESM for production. The real but indirect overhead cost of doing so is substantial.
Moreover, direct Set Up costs are sensitive to the order in which Customers are processed through the ESM. Suppose 20 different Postal Inserts, denoted as Insert 1 through Insert 20, were available to the Assignment process and, due to the Assignment process, all Customers fell into one of two groups. The first group contains Customers whose assigned Postal Inserts consist of combinations of Postal Inserts 1 through 10 only; the second group contains Customers whose assigned Postal Inserts consist of combinations 11 through 20 only. The minimum number of Set Ups required to process these Customers is two. One Set Up fills the assumed 10 bins with Postal Inserts 1 through 10.
The other Set Up fills the assumed 10 bins with Postal Inserts 11 through 20. Any order of processing that did not process all of one group before beginning to process all of the other group would necessarily result in more than two Set Ups, and thus increase direct Set Up costs. Still, while this processing order will minimize Set Up costs it is extremely unlikely that it would achieve the highest possible postal discounts.
The U.S. Postal Service offers discounts to high-volume mailers if they deliver their mailings essentially sorted by zip code. Thus, additional indirect costs of the current technology are either that postal discounts must be forgone or that additional systems and personnel to pre-sort the output from the current ESM must be employed. The ideal technology would have the cost-minimizing processing order also be the order that achieves the maximum postal discounts.
Overall, prior art technology needlessly demands that technicians be on hand throughout the day to provide the exact same number and type of Postal Objects in “dribs and drabs” due to the interruptions caused by the Set Ups. The prior art technology has solved the technical problem of adding Postal Inserts to the set of components going out as a Postal Item on a relatively small scale (i.e., with relatively small numbers of Postal Insert combinations existing in the customer base). However, the prior art has not solved the technical problem of doing so on a large scale and in an economically efficient manner.
The system and particularly the method herein may be used in many other applications in which efficiency in the distribution or allocation of objects with assigned criteria, tangible or intangible, is impaired by poor pricing policies and/or lack of comprehensive pre-processing decision procedures. Poor pricing policies can prevent mutually beneficial transactions from taking place. Lack of comprehensive pre-processing decision procedures can prevent optimal sequencing of inter-related decisions from taking place particularly when complex cost issues exist. Such other applications could include distribution or allocation of unsold airline seats within or across airlines, or distribution or allocation of unsold shipping capacity within or across transportation companies.